Financial Reform Watch

EU Takes Further Steps Towards a New Financial Supervisory Architecture


The EU this week took an important step on the path of re-organizing both its institutional set-up as well as the substantive rules related to financial reform. On Thursday, the EC Commission organized a full-day conference with representatives from the EU Institutions, national supervisors, the financial industry, consumers, and trade unions. The EC Commissioner in charge of the reform, Charlie McCreevy, confirmed that “We are on the eve of a quantum leap forward for effective supervision in the EU.”


A particular problem facing the European financial industry is how to share the burden of supervising cross-border financial groups. Some 40 to 45 large cross-border groups now account for almost 70 percent of all banking assets in Europe. The flaws of the current system are particularly acute for the new EU Member States, where banking markets are mostly dominated by foreign banks. Although the concentration of foreign banks has provided significant benefits to these Member States, it has also made it increasingly difficult for these countries to genuinely safeguard the stability of their financial systems.


In line with the de Larosière recommendations, the Commission will soon present the details of an enhanced European financial supervisory framework based on two new pillars:


The European Systemic Risk Council (ESRC) -- This Council would monitor and assess the risks to the stability of the financial system as a whole. It would provide early warning of systemic risks and, where necessary, present recommendations for actions to address these risks. The creation of the ESRC would address the fundamental weaknesses highlighted by this crisis, which is the exposure of the financial system to interconnected, complex, sectoral, and cross-sectoral systemic risks.

The European System of Financial Supervisors (ESFS) – This would be a network of national supervisors working in tandem with the new European Supervisory Authorities. The ESFS will be built on shared and mutually reinforcing responsibilities, combining nationally based supervision of firms with the centralization of specific tasks at the European level. The driver behind the network is to foster harmonized rules as well as coherent supervisory practice and enforcement.

The goal would be to have these reforms flanked by new rules to equip the EU with a single harmonized rulebook by removing the many national options and discretions from EU-financial regulation. Such a development would mean a new, far more detailed, EU legislation in the future with less scope for national differences.


On 27 May, the Commission will adopt a policy document that will set out the basic architecture for a new European financial supervisory framework that will be submitted to the EU States for endorsement a few weeks thereafter. The legislative changes to give effect to the proposed framework will likely follow in the autumn of this year - after further stakeholder consultation. The Commission’s objective is to have these reforms adopted in time for the renewed supervisory framework to be up and running in 2010. Several speakers at the conference criticized this timetable as too ambitious.

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